Macro Evolution

“The book of nature is written in the language of mathematics.”

-Galileo

More so than in any other year since we started the firm (2008), we are getting tons of questions from clients about our process – specifically, how we’ve applied breakthroughs in modern chaos theory (fractal math) to our global macro risk management process.

What’s interesting about answering these questions is that there is no silver bullet book you can read. No, they don’t teach this in business school (yet) either. I built the process on mathematical principles that are relatively new. When I want to consider evolving the process, I don’t read Jeremy Siegel – I dive into behavioral science, applied math, big history/data, etc.

Of the top 3 books that have inspired me on the interconnectedness of the Global Macro ecosystem, Eric Chaisson’s Cosmic Evolution (2001) is one of them. If you are looking to learn about my framework, all you have to do is read his Preface and Prologue. Unless you are in the business of not constantly re-learning how to operate in markets, I guarantee you can’t put this book down after 20 pages.

Back to the Global Macro Grind…

Change is good. So is being long gamma. Convexity in market pricing works on the upside too. And being long a market that continues to make higher-lows (on no-volume down days), and higher-all-time-highs on up days, works for me.

Much to the Crisis-Mongering and bit-coin advertising business chagrin, the SP500 made another fresh all-time closing high yesterday at 1570. That puts the SP500 up +10.1% for the YTD.

But, but (the most commonly used word when I keep telling people I am bullish on Asian and US Equities), “look at copper, coal, corn and…” Yes, precisely – that’s why we think both US Consumption Growth and Consumption oriented Equities are going higher.

To review how the Macro Evolution gods have scored the YTD, there are massive divergences developing between:

A) Consumption assets

B) Commodity assets

And no, an asset doesn’t have to be an asset class – that’s what people call something like Gold, after it’s gone up for 12 straight years. For the YTD, being long Gold (or Gold Miners) is what I call a liability.

#StrongDollar is driving this – there are both positive and negative correlations associated with this breakout in the US Dollar Index. For starters, let’s look at Countries (major macro equity Style Factor):

US Equities (SP500) +10% YTD vs Brazil (Bovespa) -10% YTD

UK (FTSE) +10% YTD vs Russia (RTSI) -6% YTD

So, Russia is not Brazil, but both are in an irrelevant #OldWall acronym (BRIC), and neither of these stock markets like it at all when Metal, Food, and Oil prices deflate.

In fact, this morning there’s a headline on Bloomberg that says “Gazprom Falls Under $100B, Putin Frets.” I know, poor Putin. But seriously, who the hell cares about Russians fretting over US Consumption taxes at the pump and their Cypriot laundry?

Enough about that – let’s look at the US Equity market and dig down beneath the ecosystem’s crust to look at another important quantitative Style Factor – Sector Style Risk:

US Healthcare Stocks (XLV) +17.2% YTD

US Consumer Staples (XLP) +15.1% YTD

US Consumer Discretionary (XLY) +11.8% YTD

US Basic Materials Stocks (XLB) +2.4% YTD

Yes, ‘one of these things is not like the other, one of these things just doesn’t belong’ (when you are modeling fractals you can go right batty at night, so listen to Romper Room tunes and you’ll be fine).

One of these things (Basic Materials) is being impacted by who wins/loses under a pervasively #StrongDollar macro environment.

Crisis-Mongering about Korea? Join the club – CFTC SPY net long position hitting YTD lows as Treasuries net longs ramp

I know I’m whipping around and ranting a bit – but if you truly believe in Embracing Uncertainty like we do, you want to do more of that – especially when our globally interconnected signals do.

“Contingency – randomness, chance, and stochasticity – pervades all of dynamic change on every spatial and temporal scale… science today is no longer in the prediction business… evolution predicts little of the future, yet strives to explain much of the past.” –Chaisson

THE M3: EASTER VISITATION; PACQUIAO FIGHT

The Macau Metro Monitor, April 3, 2013

107,230 VISITORS DURING EASTER HOLIDAY Macau Daily Times

Macau received 107,230 visitors during the four-day Easter holiday ending on Monday representing a 2.27% increase in comparison with last year. The Border Gate continued to be the major port for incoming and outgoing travellers, while Hengqin and the Outer Harbor Ferry Terminal were the other busy ports.

PACQUIAO-MARQUEZ FIGHT IN SINGAPORE CASINO? Strait Times

Promoter Bob Arum said he is trying to put together a fifth fight between Pacquiao and Juan Manuel Marquez and shopping it to casinos in Macau and Singapore. He said on Saturday night at the Brandon Rios-Mike Alvarado fight that the bout would likely be at one of the Venetian hotel-casinos in Macau or Singapore.

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04/03/13 06:42 AM EDT

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – April 3, 2013

As we look at today's setup for the S&P 500, the range is 17 points or 0.72% downside to 1559 and 0.37% upside to 1576.

SECTOR PERFORMANCE

EQUITY SENTIMENT:

CREDIT/ECONOMIC MARKET LOOK:

YIELD CURVE: 1.62 from 1.62

VIX closed at 12.78 1 day percent change of -5.89%

MACRO DATA POINTS (Bloomberg Estimates):

7am: MBA Mortgage Applications, March 29 (prior 7.7%)

8:15am: ADP Employment Change, March, est. 200k (prior 198k)

10am: ISM Non-Manuf Composite, March, est. 55.5 (prior 56)

10:30am: DoE inventory reports

11am: Fed to buy $3b-$3.75b in 2019-2020 sector

3:30pm: Fed’s Williams speaks in Los Angeles

5pm: Fed’s Bullard to introduce lecture in St. Louis

GOVERNMENT:

Senate, House not in session

President Obama speaks on gun control in Denver

FDIC holds discussion about community banks, 8:30am

Hagel speaks on consequences of fiscal constraints

NRC staff meets w/ officials from Edison Intl, which is seeking to resume operations at its San Onofre plant. 1pm

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VIDEO: End of a Golden Era?

Hedgeye CEO Keith McCullough appeared on CNBC’s Fast Money this evening to talk stocks and how the gold market is breaking down. Keith notes that now that gold has been breaking down over the past four weeks, sell-side analysts are going to get bearish on it, which will only add to the sell off. To see Keith’s full take on gold, skip ahead to 2:35 in the video posted above.

VIDEO: Paying Dividends

Corporations are enjoying record high levels of cash, low amounts of debt and financial flexibility in the current economy. The question is: can companies continue to keep paying out sweet dividends? Hedgeye Director of Research Daryl Jones thinks dividends will increase over time and lays out his case starting at 0:45 in the above video. Names Jones likes include Darden Restaurants (DRI) and Proctor and Gamble (PG).

FTSE: Bullish On The Margin

This week's PMI reports for the UK and Germany weren't as bad as people thought they'd be and in turn, the market was pleased enough to continue buying up UK equities. The FTSE 100 index is in bullish formation now across all three durations: TRADE, TREND and TAIL. Even if it's just a story of funds shifting capital into UK equities, it's impressive enough to garner our attention nonetheless.

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